Educational Articles

A Test Drive to Remember

Adam James Platt
| March 12, 2013

Tesla Motors (TSLA) began as a collaboration between a number of entrepreneurs, including the current CEO Elon Musk, to create affordable, mass market electric vehicles. Many in the auto industry initially dismissed the feasibility of such an endeavor until battery technology advanced by leaps and bounds. However, the progress of what began as a relatively small, altruistic enterprise has gradually succeeded at putting commercial electric vehicles on the map, both by its own innovations and by spurring the broader auto industry into action.

Early critics had history on their side. Electric cars that are capable of mass appeal have been an elusive promise. For decades, the breakthrough has been “just around the corner”. While in recent years large automakers have been releasing models with better range that are affordable on a larger scale than in the past, most attempts have been criticized as weak-kneed imitations of uninspiring traditional models.

Tesla’s Model S may be the breakthrough the industry, motor heads, and consumers have been waiting for. Whereas past electric vehicles have been accused of being cheap imitations of existing models, the Model S has won broad accolades for its originality and impressiveness compared with its peers in the sports sedan market. Indeed, where the company’s first model, the Roadster, has been criticized as an unoriginal attempt to put out a highway-capable electric vehicle for its own sake, the Model S has been winning industrywide awards.

Musk, has staked his company’s fortunes on the attempt to make an industry-leading sport sedan with the most advanced electric powertrain commercially available and car batteries that achieve unprecedented driving range. Fortunately for the company, this goal was compatible with government objectives in environmental and energy policy, and Tesla received a $465 million loan for its purpose.

What has blown away industry observers, however, are not environmental benefits, but rather the Model S’s performance. While electric cars inherently have some advantages in acceleration, the combination of size and power of the Model S has surprised even the most skeptical observers. The dashboard’s touch screen, which controls many of the car’s features and allows web access, has been widely lauded, as well.

However, the car is still dogged by the Achilles heel of electric vehicles, range anxiety, the fear of getting stranded due to the limited range of even a fully charged battery. John M. Broder of the New York Times (NYT) wrote a scathing review of his road trip test drive of the Model S. With the 265-mile estimated range for the 85 kilowatt-hour battery version (the base model has a 40 kilowatt-hour battery pack and 160-mile estimated range), the idea of the test drive was to show the real-world results of a several hundred mile northeastern road trip, newly made possible by Tesla fast-charging stations recently set up in Delaware and Connecticut. The test drive, according to Broder, ended up being an example of the plethora of problems that range limitations can bring, particularly in difficult real world conditions. For example, Broder found that cold weather, such as the freezing temperatures he encountered on his trip, could lead the battery to drain far more quickly than under ideal conditions. With the Tesla charging stations being stationed near the limits of the estimated range, the test drive ended up requiring unexpected recharging stops at non-Tesla locations and ended up with an unfortunate trip in a tow truck.

Musk has referred to the review as “fake”, arguing that the vehicle’s driving log showed that Broder didn’t fully recharge the vehicle as planned and took unplanned detours. In response, Broder wrote a point-by-point refutation of Musk’s claims. The tiff became an attractive story for technology, automotive, and business magazines.

While the two still do not see eye to eye on what exactly happened during the test run, what is clear is that it is too early to declare the end of the range-anxiety problem. However, electric cars do not necessarily need to be ideal road trip vehicles to be commercially viable on a broad scale, as the Model S’s range is more than enough for the vast majority of day-to-day driving. Furthermore, it has many advantages over its gasoline-fueled rivals. The most notable of these is savings from lower fuel costs. The company claims that the vehicle can save approximately $8,000 in such expenses over five years compared to the BMW 535i model, a competitor in the luxury sport sedan market. Maintenance costs are estimated to be significantly lower, as well.

As a result of the disappointing review, Musk claimed, Tesla saw a flurry of cancelations for orders of the automobile. He estimated that the damage could reach $100 million to the company. While the amount is uncertain, investors apparently noticed the potential harm from a review that hit an electric vehicle at its most glaring vulnerability. The stock fell about 14% from its high in early February to its low for late February, though most of that drop came after the company reported earnings results. However, shares are back near their all-time highs, as the damage was ultimately quite limited compared with the immense promise of the new product.

The company claims it is nearing profitability, despite still being at a relatively low, “early adopter” scale of production. Tesla expects to produce about 20,000 of the vehicles per year, which is a game changer compared to the Roadster, which only sold a few thousand cars in its entire run as a brand. Further, a recently implemented $2,500 price hike on the vehicle is unlikely to hurt demand by much considering the price flexibility of its high-end customers and their enthusiasm for the mold-breaking product.

Shares of Tesla may not be appropriate for the average retail investor, as the company has yet to earn a profit or pay a dividend. Further, the shares carry a Below-Average Safety rank (4) in the latest Value Line Investment Survey, as Tesla has an unimpressive balance sheet and great uncertainty over future earnings. However, the stock may hold appeal for speculative accounts, as the Model S holds the potential to be a truly transformative innovation. Indeed, the company has more projects on the way, such as the Model X, which is an SUV crossover based on the same platform as the Model S, and several collaborations with larger automakers.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.